Zillow and other institutions and funds have been gobbling up Southern Nevada homes, fully expecting people to be priced out of the market and forced to rent, analysts say.
Las Vegas, dubbed the riskiest housing market in the nation less than a year ago by real estate analyst CoreLogic, is on track to price the working class out of the market by the end of the year, says Las Vegas Realtors president Aldo Martinez, and Wall Street is scrambling to scoop up the rentals would-be buyers will be forced to lease.
Southern Nevada’s housing market, rumored to be on the brink of collapse since it began recovering in earnest from the crash of 2007, is among the upstarts of the pandemic economy, which has seemed disconnected from reality at times, with record stock market and real estate gains starkly contrasted against a backdrop of widespread financial and emotional despair.
In September 2020, real estate analyst CoreLogic predicted with 70 percent certainty that home prices in Southern Nevada would fall by 7.8 percent by July 2021.
What seemed like a sure bet proved to be a fool’s wager.
The median price of a home — $385,000 — has increased more than 14 percent since CoreLogic deemed Las Vegas the riskiest market in America.
The company did not respond to questions submitted by the Current.
“Their crystal ball works about as well as everyone else’s,” says Martinez. “If it were a science, Wall Street would be making a gazillion dollars.”
Investors, he says, are wagering that Southern Nevada’s housing prices are for real and the market is nearing a tipping point.
The median price of a single family home was $295,000 in August 2020. It’s increased $90,000 in less than a year.
“By the end of year we’ll be well over a median of $400,000, outpricing the median wage earner who will no longer be able to afford a home,” says Martinez. “That’s what Wall Street is banking on — that they’ll have to rent and become tenants.”
Martinez says investment companies such as Zillow and BlackRock are “buying up everything between $250,000 and $400,000 with some going as high as $450,000,” with the intention of turning them into rentals.
It’s a new twist on the strategy made popular by investment firm Blackstone when it gobbled up properties after the Great Recession, leasing them through a company called Invitation Homes.
“There is more institutional capital (Private equity funds such as Blackstone) flowing into such asset types now as opposed to mom and pop landlords, which were the traditional owners for such rentals,” Dr. Vivek Sah, director of UNLV’s Lied Real Estate Institute, said via email. “Such funds/institutions have a bigger appetite and hence have been purchasing in bulk especially in cities that have younger demographics and growing population (due to large in-migration like in LV MSA).
Last week, Blackstone, the company that has been buying the land beneath MGM properties and leasing the operation back to the gaming company, announced it’s spending $6 billion to acquire a company that offers rent-to-own single family homes.
“The lease to buy option is not very popular yet due to the complex nature of the set-up,” Sah says.
Martinez admits he does not know what percentage of sales in Southern Nevada are to institutional investors.
“That would be a guess, at best, on my part,” he said.
A recent story in Vox discounts the theory that investors are responsible for the runaway appreciation, citing a 2018 research paper that found investors “account for less than one percent of all single-family housing units across the U.S.”
Sah says single family rentals cater to young people who may prefer to rent for a number of reasons, “including demographics shifts towards delayed home-ownership, and preference for more community based amenities including more space, access to green space, preference for longer stay, schools and neighborhood feeling,” oppposed to the transient nature of apartments.
About to bottom out?
Look and you’ll find no shortage of predictions the market is about to cool, if not crash.
“Nationwide, house prices appear overvalued by approximately 10% to 15% when comparing price-to-income or price-to-rent ratios with their long-run historical averages, according to my analysis,” economist Mark Zandi wrote this week for CNN. “Some markets, mostly in the South and West, are seriously overvalued — by more than 20%.”
“Think about how much values have increased. Even if prices dropped by 20%, we’d still be in a good place,” says Martinez.
While first-time buyers are challenged to enter the market, seasoned owners are buying up second homes.
“The combination of the wealthy becoming wealthier, remote work turning into the new normal and low mortgage rates is creating an ideal environment for affluent Americans to buy vacation homes,” said Redfin Chief Economist Daryl Fairweather. “As long as the economy continues to grow, I don’t foresee demand for second homes slowing down anytime soon.”
An April dip in housing units sold prompted media reports of a cooling market, until a rebound in May.
“May’s strong increase in transactions — following April’s decline, as well as a sudden erosion in home affordability — was indeed a surprise,” Lawrence Yun, chief economist at the National Association of Realtors, said in a statement. “The housing market is attracting buyers due to the decline in mortgage rates, which fell below 3%, and from an uptick in listings.”
Martinez says June sales are likely to be down — the result of a seasonal blip.
“What you’re seeing right now is every June the agents’ kids are out of school and they go on vacation. So we have that little summer lull,” he says. “We’re probably going to close 3,100 or 3,200 sales this month and it’s going to set off another series of news reports that we’re down 500.”
Expect for sales to pick back up in late July and early August, in time for buyers to get settled by the holidays, he says.
“When I get worried is like December of 2007 when we sold 700 homes. That’s when I get worried,” Martinez says. “The chance we see another cycle like 2007 is highly unlikely.”
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